Polaris Consulting & Services Limited, CHENNAI V. DCIT, CHENNAI

ITA 447/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8147 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 03-10-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 29-02-2016
• Court: TRIBUNAL
• Department Lawyers: DR M M BHUSARI
• Assessee Lawyers: S VENKATARAMAN
• Keywords: Related party transaction; Transfer pricing; International transaction; Earning of tax free income; Additional evidence; Initiation of penalty proceedings
• Section: 143(3); 142(1); 234B; 14A; 133(6)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . , . , BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 447/MDS/2016 / ASSESSMENT YEAR :20 0 7 - 0 8 M/S. POLARIS CONSULTING & SERVICES LTD., [FORMERLY KNOWN AS POLARIS FINANCIAL TECHNOLOGY LTD.], NO. 244, POLARIS HOUSE, ANNA SALAI, CHENNAI 600 0 06. [PAN: A A AC P 4341E ] VS. THE DEPUTY COMMISSIONER OF INCOME TAX , CO RPORATE CIRCLE 5 ( 2 ) , CHENNAI 600 034 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI S. VENKATARAMAN , ADVOCATE / RESPONDENT BY : DR. M.M. BHUSARI , CIT / DATE OF HEARING : 0 3 . 1 0 .201 6 / DATE OF P RONOUNCEMENT : 02 . 0 1 .201 7 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER DATED 2 9 .0 1 .201 6 PASSED BY THE LD. ASSESSING OFFICER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] PURSUANT TO THE LD. TPO RECOMMENDATION GIVING EFFECT TO THE DIRECTIONS DATED 30 . 12.2015 OF LD. DISPUTE RESOLUTION PAN EL (HEREIN REFERRED AS THE DRP ). 2. THE ASSESSEE IS ONE OF THE LEADING SOFTWARE SOLUTION PROVIDERS, SPEC I AL I Z I N G IN PROVIDING QUALITY AND CUSTOMIZED IT SOLUTIONS TO SEVERAL I.T.A. NO. 44 7/M/1 6 2 MULTINATIONAL CLIENTS IN THE B ANK ING, FINANCIAL SERVICES AND INSURANCE (BFSI ) DOMAIN. THE ASSESSEE FILED RETURN OF I NCOME ON 30. 10 . 2007 ADMITTING INCOME OF .18,91,93,357/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE I SSUED. IN RESPONSE THE RETO, THE SENIOR M ANAGER, TAXATION OF THE ASSESSEE COMPANY APPEARED AND FILED THE DETAILS CALLED FOR. 2. 1 A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER - II , CHENNA I FOR DETERMINING THE ARMS LENGTH PRICE I N RESPECT OF ASSESSEE'S TRANSACTION WITH I TS ASSOCIATE ENTERPRISES. THE TP O - II, CHENNAI, VIDE HIS ORDER DATED 26 . 10 . 2010, HAD PROPOSED AN ADJUSTMENT OF . 1,10,82,70,000/ - TO THE PRICE CHARGED BY THE ASSESSEE FOR SOFTWARE MAINTENANCE AND ENABLED BACK OFFICE OPERATIONS RENDERED TO ITS ASSOCIATED ENTERPRISES SITUATED OUTSIDE IN DIA. HENCE, THE TOTAL INCOME OF THE ASSESSEE WAS ACCORDINGLY ADJUSTED UPWARDLY . 1 1 0,82, 7 0,000/ - IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 92C(4) OF THE ACT. 2.2 T HE ASSESSING OFFICER PASSED DRAFT ASSESSMENT ORDER UNDER SECTION 143(3) R. W.S. 144C OF THE ACT ON 31.12.2010 INCORPORATING THE ADJUST MENT PROPOSED BY THE TPO ALONGWI TH THE FOLLOWING ADDITIONS: (I) AN ADJUSTMENT TO ARMS LENGTH PRICE TO THE EXTENT OF .1,10,82,70,000/ - WITH REFERENCE TO TRANSFER PRICING OFFICER S (TPO) ORDER IN RESPECT OF INTERNATIONAL TRANSACTION DEALT BY THE ASSESSEE WITH ITS AE. (II) RECOMPUTAT I ON OF D EDUCTIONS U NDER SECTION 10 A OF THE ACT. I.T.A. NO. 44 7/M/1 6 3 (I I I) RE - COMPUTATION OF I NCOME UNDER TH E HEAD 'OTHER SOURCES' . (I V ) D I SALLOWANCE U NDER SECTION 14A READ WITH RULE 8D. 2.3 AGGRIEVED BY THE DRAFT ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE DRP UPHELD THE ADDITIONS MADE BY THE TPO/AO. ACCORDINGLY, FINAL ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S.144C (5) OF THE ACT WAS PASSED BY THE ASSESSING OFFICER ON 12.10.2011 CONFIRMING THE ADDITIONS MADE IN THE DRAFT ASSESSMENT ORDER . 2.4 AGAINST THE ASSESSMENT ORDER, THE ASSESSEE FILED A WRIT PETITION BEFORE THE HON'BLE HIGH COURT OF MADRAS STATING THAT THE TPO HAD COMPLETED THE ORDER USING THE INFORMATION COLLECTED UNDER SECTION133(6) OF THE ACT AND SUCH INFORMATION WAS NOT AVAILA BLE TO THE ASSESSEE. THE HON'BLE HIGH COURT PASSED AN ORDER ON 15.11.2011 BY WHICH THE ORDERS PASSED BY THE DRP AND THE TPO - II WERE SET ASIDE AND THE MATTER WAS REMITTED BACK TO THE TRANSFER PRICING OFFICER WITH A DIRECTION THAT THE ASSESSMENT BE CONCLUDED AFRESH, AFTER PROVIDING THE NECESSARY INFORMATION TO THE ASSESSEE. PURSUANT TO THE ORDER OF THE HON'BLE HIGH COURT, THE TPO - II, CHENNAI, HAS PASSED ORDER DATED 29.01.2015, PROPOSING AN UPWARD ADJUSTMENT OF . 57,05,68,292/ - TO THE ARMS LENGTH PRICE CHARGE D BY THE ASSESSEE FOR SOFTWARE MAINTENANCE AND IT - ENABLED BACK OFFICE OPERATIONS RENDERED TO ITS ASSOCIATED ENTERPRISES I.T.A. NO. 44 7/M/1 6 4 SITUATED OUTSIDE INDIA . SUBSEQUENTLY, A DRAFT ASSESSMENT ORDER DATED 30.03.2015 WAS PASSED ADDING UPWARD ADJUSTMENT OF . 57,05,68,292/ - TO THE ARMS LENGTH PRICE CHARGED BY THE ASSESSEE FOR SOFTWARE MAINTENANCE AND IT - ENABLED BACK OFFICE OPERATIONS RENDERED TO ITS AES SITUATED OUTSIDE INDIA. AGGRIEVED BY THE DRAFT ORDER PASSED BY THE AO, ASSESSEE FILED AN APPEAL SEEKING DIRECTIONS BEFORE THE DISPUTE RESOLUTION PANEL. THE DRP VIDE DIRECTIONS DATED 30.12.2015 NOT OFFERED ANY RELIEF TO THE ASSESSEE AND HENCE THE DRAFT ASSESSMENT ORDER DATED 30.03.2015 HOLDS GOOD. ACCORDINGLY, THE FINAL ASSESSMENT ORDER WAS COMPLETED CONSIDERING THE INCOME COM PUTED IN THE DRAFT ASSESSMENT ORDER BY ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT .95,04,79,013/ - AFTER MAKING VARIOUS ADDITIONS. 3. ON BEING AGGRIEVED BY THE FINAL ORDER PASSED BY THE ASSESSING OFFICER , THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNA L RAISING 33 GROUNDS . 3.1 GROUND NO. 1 & 2 ARE GENERAL IN NATURE AND NO SPECIFIC ADJUDICATION IS CALLED FOR AND HENCE, THE SAME ARE DISMISSED. 3.2 GROUND NO. 32 IS REGARDING CHARGING OF INTEREST UNDER SECTION 234B AND 234D OF THE ACT. THE LEVY OF INTERE ST IS MANDATORY AND CONSEQUENTIAL AND HENCE THE GROUNDS ARE DISMISSED. 3.3 GROUND NO. 33 IS REGARDING THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. THE CHALLENGE TO INITIATION OF PENALTY PROCEEDINGS IS PREMATURE, HENCE THIS GR OUND IS ALSO DISMISSED. I.T.A. NO. 44 7/M/1 6 5 3.4 GROUND NO. 23 TO 26 IS WITH REGARD TO RECOMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 3.5 GROUND NO. 27 TO 31 IS WITH REGARD TO DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A BY ATTRIBUTING THE SAME TOWARDS EARNING O F DIVIDEND INCOME. 3.6 GROUND NO. 3 TO 19 IS WITH REGARD TO TRANSFER PRICING ISSUE AND OTHER MISCELLANEOUS GROUNDS RELATING TO TRANSFER PRICING ISSUE ARE RAISED IN GROUND NO. 20 TO 22 . 4. AS PER ORDER UNDER SECTION 92CA OF THE ACT DATED 26.10.2010, THE TPO HAVING REJECTED THE CUP METHODOLOGY FOR TRANSACTIONS WITH CITIBANK ENTITIES, HE ADOPTED AN ENTITY WIDE TNMM FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS AND ARRIVED AT AN OPERATING PROFIT MARGIN OF THE ASSESSEE AT 11.47 PERCENT ON OPERATING COST. CO NSEQUENT TO THE ABOVE, BY EXERCISING THE POWERS CONFERRED UNDER SECTION 92CA(7) R.W.S. 133(6) OF THE ACT, THE TPO CONDUCTED A FRESH SEARCH IN PROWESS AND CAPITAL LINE FOR IDENTIFICATION OF COMPARABLES ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES SIM ILAR TO THAT OF POLARIS INDIA AND APPLIED THE FOLLOWING FILTERS: COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2007 WERE EXCLUDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REVENUE 25% OF THE REVENUES 96 68 9 BALANCE 28 THE BALANC E COMPANIES HAVE BEEN EXAMINED FURTHER AS FOLLOWS. IN SOME OF THE COMPANIES, THE RPT INFORMATION, SEGMENTAL INFORMATION, ONSITE REVENUES INFORMATION AND OTHER INFORMATION RELATING TO FUNCTIONALITY IS NOT AVAILABLE. THE SAME WERE ASKED UNDER SECTION 133(6) FROM THE COMPANIES BY THE BANGALORE TP OFFICE. OUT OF THESE, 28 COMPANIES HAVE BEEN PROPOSED AS COMPARABLES BASED ON THE INFORMATION RECEIVED FROM THE COMPANIES. THE SEARCH PROCESS IN CAPITAL L INE PLUS DATABASE WAS CARRIED UNDER THE HEAD 'INDUSTRY' BASED ON THE FOLLOWING KEY WORDS I) COMPUTER - SOFTWARE - CONVERTS II) COMPUTER - SOFTWARE - LARGE COMPUTER - SOFTWARE - MEDIUM / SMALL SEGMENTAL SEARCH WAS ALSO CONDUCTED FOR COMPANIES WHO HAVE SEGMENT RELATING TO SOFTWARE DEVELOPMENT SERVICES. UNDER T HE MAIN HEAD 'QUERY BY I.T.A. NO. 44 7/M/1 6 8 PRODUCT / SEGMENT' IN PROWESS DATABASE, AND SUB HEAD 'SEGMENT WISE INFORMATION', THE KEY WORD 'SOFTWARE' WAS SEARCHED. AS PER TPO S ORDER DATED 26.10.2010, T HE SEARCH RESULTED IN 28 COMPARABLE COMPANIES AND THE AVERAGE OP MARGIN OF C OMPARABLES IS 27.96% AS AGAINST THE COMPANY'S MARGIN OF 11.39%. THE LIST OF COMPARABLES IS FURNISHED BELOW: SL. NO. COMPANY NAME SALES (RS.CR.) OP TO TOTAL COST% DATA BASE 1 ACCEL TRANSMATIC LTD (SEG.) 9.68 21.11% P (SEG.) 2 AVANI CIMCON TECH NOLOGIES LTD 3.55 52.59% P 3 BODHTREE CONSULTING LTD (SEG.) 7.40 109.79% P 4 CELESTIAL LABS LTD 14.13 58.35% P 5 DATAMATICS LTD 54.51 7.27% P 6 EZEST SOLUTIONS LTD 6.26 36.12% P (SEG.) 7 FLEXTRONLCS SOFTWARE SYSTEMS LTD (SEG.) 84 8.66 25.31% 8 GEOMETRIC LTD (SEG.) 158.38 10.71% P 9 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 183.51 40.35% P 10 IGATE GLOBAL SOLUTIONS LTD 747.27 7.49% P 11 INFOSYS TECHNOLOGIES LTD 13149 40.30% P 12 ISHIR INFOTECH LTD 7 .42 30.12% C 13 KALS INFORMATION SYSTEMS LTD (SEG.) 2.00 30.55% P 14 LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 45.39 15.75% P 15 LUCID SOFTWARE LTD 1.70 54.85% P 16 MEDIASOFT SOLUTIIONS LTD 1.85 3.66% P 17 MEGASOFT LTD (SEG.) 63. 71 23.11% P 18 MINDTREE LTD 590.35 16.90% P 19 PERSISTENT SYSTEMS LTD 293.75 24.52% P 20 QUINTEGRA SOLUTIONS LTD 62.72 12.56% P 21 R S SOFTWARE (INDIA) LTD 101.04 13.47% P 22 R SYSTEMS INTERNATIONAL LTD (SEG.) 112.01 15.07% P 2 3 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 343.57 22.16% P 24 SIP TECHNOLOGIES & EXPORTS LTD 3.80 13.90% P 25 TATA ELXSI LTD (SEG.) 262.58 26.51% P 26 THIRDWARE SOLUTIONS LTD 36.08 25.12% C 27 TVS INFOTECH LTD 7.24 11.61% P 28 WIPRO LTD (SEG.) 9616.09 33.65% P 27.96% IT IS EVIDENT FROM THE ABOVE DISCUSSION THAT THE ASSESSEE'S TRANSACTIONS WILL NOT BE ARM'S LENGTH CONSIDERING THE FACT THAT THE AVERAGE OP MARGIN OF THE I.T.A. NO. 44 7/M/1 6 9 28 COMPARABLES IS 27.96% AS AGAINST THE OPERATING PROFIT (ON OPERATING COST) OF 11.47% . THEREFORE, THE ASSESSEE WAS REQUESTED TO SHOW - CAUSE WHY THE DIFFERENCE BETWEEN THE ARM'S LENGTH PROFIT AND PROFIT ARISING OUT OF THE INTERNATIONAL TRANSACTIONS SHOULD NOT BE ADDED BACK. AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE, THE TPO FINALLY CONCLUDED THE TRANSFER PRICING ANALYSIS WITH 26 COMPANIES (AFTER ACCEPTING THE CONTENTION OF THE ASSESSEE ON 2 COMPARABLE COMPANIES) AND ARRIVED AT THE ALP TO BE AT 25.44% AND ADJUSTED THE DIFFERENTIAL PERCENTAGE OF 14.05 % (25.44% - 11.39 %) TO THE RETURNED INCOME PROPOSING AN ADJUSTMENT OF INR 110.827 CRORES. THE ADJUSTMENT MADE BY THE TPO WAS AFFIRMED BY THE DRP VIDE ITS ORDER DATED 28.09.2011 UNDER SECTION 144C(5) OF THE ACT. 5. THE ASSESSEE CARRIED THE MATTER IN APPE AL BEFORE THE HON BLE MADRAS HIGH COURT WITH REGARD TO THE INFORMATION/DOCUMENTS THAT WAS COLLECTED BY THE TPO FOR DETERMINATION OF ARMS LENGTH PRICE USING POWERS UNDER SECTION 133(6) OF THE ACT SINCE THE INFORMATION WERE NOT PUT TO THE ASSESSEE. ACCORDIN GLY, THE HON BLE MADRAS HIGH COURT IN WP NOS. 23564 AND 24976 OF 2011 AND MP NOS. 1 OF 2011 DATED 15.11.2011 REMITTED THE MATTER BACK TO THE TPO TO FURNISH NECESSARY INFORMATION TO THE ASSESSEE AND COMPLETE THE PROCEEDINGS. ACCORDINGLY, VIDE ORDER DATED 29 .01.2015, THE TPO HAS REVISED HIS ORDER LIMITING ITS SCOPE CONFINED TO THE COMPARABLES USED BY THE TPO BASED ON INFORMATION COLLECTED BY EXERCISING THE POWERS UNDER SECTION I.T.A. NO. 44 7/M/1 6 10 133(6) OF THE ACT. BASED ON THE NOTICES ISSUED UNDER SECTION 133(6) OF THE ACT TO 1 49 COMPANIES AND REPLIES RECEIVED FROM 116 COMPANIES, THE ASSESSEE FOUND THE FOLLOWING 8 COMPANIES AS FUNCTIONALLY COMPARABLE AND SCREENED THROUGH THE FILTERS APPLIED BY THE TPO: APPLABS TECHNOLOGIES PVT. LTD. BINARY SEMANTICS LTD. CHAKKILAM INFOTECH LTD. GLOBSYN INFOTECH MAVERIE SYSTEMS LTD. NEILSOFT LTD. SCIENTIFIC - ATLANTA TECHNOLOGY INDIA PVT. LTD. VISION COMPTECH INTEGRATORS LTD. 5.1 THE TPO HAS AGREED THAT THE ABOVE COMPANIES PASS ALL THE FILTERS AS ADOPTED BY THE TPO FOR TAKING AS COMPARABLES. HOWE VER, THE ASSESSEE HAS CONTENDED AGAINST TAKING THE FOLLOWING COMPANIES AS COMPARABLES FOR WHICH DETAILED SUBMISSIONS BEFORE THE DRP WERE FURNISHED: AVANI CIMCON TECHNOLOGIES LTD. CELESTIAL LABS LTD. FLEXTRONICS SOFTWARE SYSTEMS INFOSYS TECHNOLOGIES LTD. IS HIR INFOTECH LTD. KALS INFORMATION SYSTEMS LTD. LUCID SOFTWARE LTD. MEGASOFT LTD. MEDIASOFT LTD. TATA ELXSI LTD. (SEG) 5.2 HOWEVER, THE TPO REJECTED THE PLEA OF EXCLUSION OF THE ABOVE TEN COMPANIES FROM THE LIST OF COMPARABLES SINCE THE COMPARABLES SELECT ED BY THE TPO IN ORDER DATED 26.10.2010 WAS NOT DISTURBED BY THE HON BLE HIGH I.T.A. NO. 44 7/M/1 6 11 COURT. ACCORDINGLY, THE TPO HAS DRAWN THE FOLLOWING FINAL LIST WITH 34 COMPANIES WITH OPERATING MARGINS AND THE WEIGHTED AVERAGE WAS 22.73% . SL. NO. COMPANY NAME OP TO TOTAL C OST% 1 ACCEL TRANSMATIC LTD (SEG.) 21.11% 2 AVANI CIMCON TECHNOLOGIES LTD 52.59% 3 CELESTIAL LABS LTD 58.35% 4 DATAMATICS LTD 7.27% 5 EZEST SOLUTIONS LTD 36.12% 6 FLEXTRONLCS SOFTWARE SYSTEMS LTD (SEG.) 25.31% 7 GEOMETRIC LTD (SEG.) 10.71% 8 HELIOS & MATHESON INFORMATION TECHNOLOGY LTD 40.35% 9 IGATE GLOBAL SOLUTIONS LTD 7.49% 1 0 INFOSYS TECHNOLOGIES LTD 40.30% 11 ISHIR INFOTECH LTD 30.12% 12 KALS INFORMATION SYSTEMS LTD (SEG.) 30.55% 13 LGS GLOBAL LTD (LANCO GLOBAL SOL UTIONS LTD) 15.75% 14 LUCID SOFTWARE LTD 54.85% 15 MEDIASOFT SOLUTIONS LTD 3.66% 16 MEGASOFT LTD (SEG.) 23.11% 17 MINDTREE LTD 16.90% 18 PERSISTENT SYSTEMS LTD 24.52% 19 QUINTEGRA SOLUTIONS LTD 12.56% 20 R S SOFTWARE (INDIA) LTD 13.47 % 21 R SYSTEMS INTERNATIONAL LTD (SEG.) 15.07% 22 SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) 22.16% 23 SIP TECHNOLOGIES & EXPORTS LTD 13.90% 24 TATA ELXSI LTD (SEG.) 26.51% 25 THIRDWARE SOLUTIONS LTD 25.12% 2 6 WIPRO LTD (SEG.) 33.65% 27 APPLABS TECHNOLOGIES PVT. LTD. 14.05% 28 BINARY SEMANTICS LTD. 12.33% 29 CHAKKILAM INFOTECH LTD. 6.35% 30 GLOBSYN INFOTECH 14.33% 31 MAVERIC SYSTEMS LTD. 27.34% 32 NEILSOFT LTD. 4.74% 33 SCIENTIFIC - ATLANTA TECHNOLOGY INDIA PVT. LTD. 16.29% 34 VISION COMPTECH INTEGRATORS LTD. 16.12% WEIGHTED AVERAGE 22.73% 5.3 ACCORDINGLY, T HE TPO/AO AS WELL AS THE LD. DRP HAVE MADE AN UPWARDS ADJUSTMENT TO THE ASSESSEE S INTERNATIONAL TRANSACTIONS IN THE I.T.A. NO. 44 7/M/1 6 12 NATURE OF PROVISION OF SOFTWARE SERVICES AMOUNT TO .57,05,68,292/ - . THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED WITH REGARD TO SOFTWARE SERVICES PROVIDED TO CITI GROUP ENTITIES THAT THE AUTHORITIES BELOW HAVE WENT IN WRONG IN REJECTING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST A PPROPRIATE METHOD FOR DETERMINING THE ARM S LENGTH PRICE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION . BY FILING COPY OF THE ORDER OF THE LD. DRP FOR THE ASSESSMENT YEAR 2008 - 09 DATED 12.04.2013 PASSED UNDER RULES 13 OF THE DRP RULES R.W.S. 144C(5) OF THE A CT, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE LD. DRP HAS OBSERVED THAT COMPARABLE UNCONTROLLED PRICE (CUP) METHOD I S THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM S LENGTH PRICE FOR THE ASSESSMENT YEAR 2008 - 09, WHICH IS VIOLATING THE P RINCIPLES OF CONSISTENCY AND PRAYED THAT THE ASSESSING OFFICER MAY BE DIRECTED TO ACCEPT CUP METHOD. REFERRING TO THE GROUNDS OF APPEAL, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE TPO/AO HAS SELECTED CERTAIN COMPANIES AS COMPARABLES WHICH ARE FUNCTIONALLY DIFFERENT AND DO NOT SATISFY CERTAIN WELL ACCEPTED COMPARABILITY CRITERIA AND PLEADED THAT SUCH FUNCTIONALLY DIFFERENT COMPANIES ARE TO BE EXCLUDED FROM THE LIST. MOREOVER, CERTAIN COMPANIES WERE INCLUDED WHICH HAD VARIOUS EXTRAORDINARY EVENTS , INCLUDING MERGER/AMALGAMATION, ETC. FURTHER, IT WAS ALSO PLEADED THAT CERTAIN COMPANIES INCLUDED WHICH ARE EARNING SUPER PROFITS AND HAVE THE ABILITY TO SKEW THE EXERCISE OF ARM S LENGTH DETERMINATION SHOULD ALSO BE EXCLUDED FROM THE LIST OF COMPARABLES. I.T.A. NO. 44 7/M/1 6 13 6. PER CONTRA, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 7 . WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE, UN DER RULE 29 OF THE INCOME TAX (AT) RULES, FILED AN APPLICATION FOR ACCEPTANCE OF ADDITIONAL EVIDENCE OF DRP S ORDER FOR THE ASSESSMENT YEAR 2008 - 09 HOLDING THAT CUP METHOD IS MOST APPROPRIATE METHOD . WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE DRP FOR THE ASSESSMENT YEAR 2008 - 09 AND A FTER CONSIDERING THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE, WE HAVE NO QUARREL WITH HIS SUBMISSION THAT T HE TP REGULATION CALLS FOR TRANSACTION BY TRANSACTION TOWARDS ALP DETERMINATION. IN THE ASSESSMENT YE AR 2008 - 09 ALSO, THE TPO CLUBBED ALL THESE TRANSACTIONS WHICH INCLUDE THE TRANSACTIONS WITH THE CITIGROUP ENTITIES AS WELL AS WITH OTHER ASSOCIATED ENTERPRISES, AND PROCEEDED TO APPLY TNMM. HOWEVER, DRP HELD CUP TO BE THE MOST APPROPRIATE METHOD. AS PER DRP, WHEN TP REGULATIONS CALL ED FOR TRANSACTION - BY - TRANSACTION ALP DETERMINATION, SUCH CLUBBING WAS NOT IN ORDER UNLESS THERE WA S A STRONG REASON. AS PER DRP, UNLESS THE TRANSACTIONS WERE SO INTERTWINED AND ASSOCIATED THAT IT WA S DIFFICULT TO DISENTANGLE T HEM, TRANSACTIONAL NET MARGIN METHOD, WHERE PROFIT OF THE ENTITY WA S COMPARED WITH OTHER COMPARABLES , COULD NOT BE USED . ACCORDING TO THE LD. DR, NO SUCH CASE WAS MADE OUT BY THE TPO FOR THE ASSESSMENT YEAR 2008 - 09 AND MOREOVER, THE ASSESSEE W AS I.T.A. NO. 44 7/M/1 6 14 ABLE TO DE MONSTRATE THAT THERE WE RE COMPARABLES AVAILABLE TO DETERMINE THE ALP OF THESE TRANSACTIONS UNDER THE CUP METHOD. IT WAS FOR THESE REASONS THAT , THE LD. DRP OPINED FOR THE ASSESSMENT YEAR 2008 - 09 THAT THE TPO SHOULD HAVE ADOPTED CUP FOR THE TRANSACTIONS REL ATING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE CITIGROUP ENTITIES AND ACCORDINGLY HELD THAT THE CUP METHOD IS MOST APPROPRIATE METHOD. HOWEVER, FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAS NOT PROVIDED THE TOTAL VOLUME OF TRANS ACTIONS WITH UNRELATED PARTIES, BOTH ON SITE AND OFF SHORE. MOREOVER, AS PER TP DOCUMENTS, COMPLETE FINANCIAL DATA FOR THE FINANCIAL YEAR APRIL 01, 2006 TO MARCH 31, 2007 WAS NOT AVAILABLE IN MOST OF THE CASES. OVER AND ABOVE MULTIPLE YEAR DATA CANNOT BE A DOPTED BY THE ASSESSEE WITHOUT GIVING A VALID REASON FOR THE SAME. IN VIEW OF THE PROVISIONS OF SECTION 10B(4) OF THE ACT, CURRENT YEAR S DATA HAS TO BE ADOPTED FOR THE PURPOSE OF COMPARING CONTROLLED AND UNCONTROLLED TRANSACTION. HOWEVER, THE ASSESSEE HAS CONSIDERED THE PAST 2 YEAR S DATA WHICH IS NOT CORRECT AND HENCE THE SAME WERE RIGHTLY REJECTED BY THE AUTHORITIES BELOW. APART FROM THAT THE ASSESSEE HAS ALSO USED COMPARABLES, WHOSE FINANCIAL YEAR ENDED ON DATES OTHER THAN MARCH 31, WHICH IS ALSO NOT AC CEPTABLE SINCE THE INDIAN INCOME TAX ACT FOLLOWS FINANCIAL YEAR APRIL TO MARCH. THE TRANSACTIONS BETWEEN ASSESSEE AND CITIGROUP AND ASSESSEE AND OTHERS FELL IN THE SAME CLASS THOUGH FEATURES OF THE SOFTWARE MAY HAVE BEEN NOT IDENTICAL. IN SUCH CIRCUMSTANCE S, TNMM WAS DEFINITELY MORE APPROPRIATE I.T.A. NO. 44 7/M/1 6 15 THAN CUP. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, THE RELIANCE PLACED BY MEANS OF ADDITIONAL EVIDENCE OF DRP S ORDER FOR THE ASSESSMENT YEAR 2008 - 09 HOLDING THAT CUP METHOD IS MOST APPROPRIATE METHOD, HAS NO APPLICA TION TO THE FACTS IN THE ASSESSMENT YEAR UNDER CONSIDERATION. FOR USING CUP, IT IS REQUIRED THAT IDENTICAL SUPPLY OR PURCHASE OF GOODS/SERVICES FROM UNRELATED PARTIES CAN BE IDENTIFIED. ASSESSEE COULD NOT SHOW THAT THE COMPARABLES SELECTED WERE IDENTICAL. THEREFORE, WE CANNOT HOLD THAT THE CUP METHOD WA S THE MOST APPROPRIATE METHOD AS CLAIMED BY THE ASSESSEE. IN THE CIRCUMSTANCES, ACCORDING TO US, TNMM WAS RIGHTLY CONSIDERED AS THE APPROPRIATE METHOD. 8. HAVING HELD THE TNMM I S THE MOST APPROPRIATE METHOD , AFTER CONSIDERING THE CASE OF THE ASSESSEE FOR ANALYSING WITH INTERNATIONAL TRANSACTIONS RELATING TO ITS ASSOCIATED ENTERPRISES, WE HAVE TO DEAL WITH THE EXCLUSION AND INCLUSION SOUGHT BY THE ASSESSEE FROM THE LIST OF COMPARABLES FINALLY SELECTED BY THE TPO . 8.1 V IS - - VIS AVANI CI M CO N TECHNOLOGIES LTD . , T HE ARGUMENTS OF THE ASSESSEE ARE THAT IT IS HAVING SUPER NORMAL PROFIT AND IT IS ENGAGED IN BOTH SOFTWARE PRODUCTS AND SERVICES . THE LD. AR OF THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF NXP SEMIC ONDUCTORS INDIA PVT. LTD. IN I.T (TP) .A. NO. 1174/BANG/2011 VIDE ORDER DATED 14.11.2014 , AOL ONLINE INDIA PVT. LTD. ITA 1036/BANG/2011 DATED 18.03.2016 AS WELL AS LSI RESEARCH (INDIA) P. I.T.A. NO. 44 7/M/1 6 16 LTD. IN ITA NO. 1048/BANG/2011 AND PLEADED THAT AVANI CIMCON SHOULD NO T BE TAKEN AS COMPARABLE . ON PERUSAL OF THE DETAILS AVAILABLE WITH REGARD TO AVANI CIMCON, THIS COMPANY HAS DEVELOPED A SOFTWARE PRODUCT BY NAME DXCHANGE AND IT WAS ALSO SUBMITTED THAT THIS COMPANY WOULD HAVE REVENUE FROM SOFTWARE PRODUCT SALES APART FRO M RENDERING OF SOFTWARE SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE MUMBAI BENCH OF THE TRIBUNAL TO THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT IN ITA NO.7821/MUM/ 2011 WHER EIN THE TRIBUNAL ACCEPTED THE ASSESSEE S CONTENTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE PRODUCT AND OBSERVED THAT IN THE ABSENCE OF SEGMENTAL DETAILS, AVANI CIMCON CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE WHO WAS RENDERING SOFTWARE DEVELO PMENT SERVICES ONLY . MOREOVER, IN THE CASE OF NOVELL SOFTWARE DEVELOPMENT (INDIA) P. LTD. V. DCIT IN ITA NO. 1287/BANG/2011 DATED 31.03.2016 FOR THE ASSESSMENT YEAR 2007 - 08, THE BANGALORE BENCH OF THE TRIBUNAL HAS ALSO DECIDED TO REJECT AVANI CIMCON AS COM PARABLE BY OBSERVING AS UNDER: 7.8 AVANI CINCOM TECHNOLOGIES LTD. ( AVANI CINCOM ): HERE IN THIS CASE ALSO THE SEGMENTAL DETAILS OF OPERATING INCOME OF IT SERVICES AND SALE OF SOFTWARE PRODUCTS HAVE NOT BEEN PROVIDED SO AS TO SEE WHETHER THE PROFIT RATI O OF THIS COMPANY CAN BE TAKEN INTO CONSIDERATION FOR COMPARING THE CASE THAT OF ASSESSEE. IN ABSENCE OF ANY KIND OF DETAILS PROVIDED BY THE TPO, WE ARE UNABLE TO PERSUADE OURSELVES TO INCLUDE IT AS COMPARABLE PARTY. LEARNED CIT DR HAS PROVIDED A COPY OF P ROFIT LOSS ACCOUNT WHICH SHOWS THAT MAINLY ITS EARNING IS FROM SOFTWARE EXPORTS, HOWEVER, THE DETAILS OF PERCENTAGE OF EXPORT OF PRODUCTS OR SERVICES HAVE NOT BEEN GIVEN. WE, THEREFORE, REJECT THIS COMPANY ALSO FROM TAKING INTO CONSIDERATION FOR COMPARABIL ITY ANALYSIS. IT WAS ALSO I.T.A. NO. 44 7/M/1 6 17 HIGHLIGHTED THAT THE MARGIN OF THIS COMPANY AT 52.59% WHICH REPRESENTS ABNORMAL CIRCUMSTANCES AND PROFITS. THE FOLLOWING FIGURES WERE PLACED BEFORE US: - PARTICULARS FY 05 - 06 06 - 07 07 - 08 08 - 09 OPERATING REVENUE 21761611 35477523 29342809 28039851 OPERATING EXPNS. 16417661 23249646 23359186 31108949 OPERATING PROFIT 5343950 12227877 5983623 (3069098) OPERATING MARGIN 32.55% 52.59% 25.62% - 9.87% 40. IT WAS SUBMITTED THAT THIS COMPANY HAS MADE UNUSUALLY HIGH PROFIT DURING THE FINANCIAL YEAR 06 - 07. THE OPERATING REVENUES INCREASED 63.03% WHICH INDICATES THAT IT WAS AN EXTRAORDINARY YEAR FOR THIS COMPANY. EVEN THE GROWTH OF SOFTWARE INDUSTRY FOR THE PREVIOUS YEAR AS PER NASSCOM WAS 32%. THE GROWTH RATE OF THIS COMPANY WAS DOUBLE THE INDUSTRY AVERAGE. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THIS COMPANY OUGHT TO HAVE BEEN REJECTED AS A COMPARABLE. 41. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSIONS MA DE ON BEHALF OF THE A SSESSEE AND ARE OF THE VIEW THAT THE SAME DESERV ES TO BE ACCEPTED. THE REASONS GIVEN BY THE A SSESSEE FOR EXCLUDING THIS COMPANY AS COMPARABLE ARE FOUND TO BE ACCEPTABLE. THE DECISION OF ITAT (MUMBAI) IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. V. ACIT (SUPRA) ALSO SUPPORTS THE PLEA OF THE ASSESSEE. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE TO REJECT THIS COMPANY AS A COMPARABLE. ACCORDINGLY, WE HEREBY ORDER TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 8.2 VIS - - VIS ACCEL TRANSMATIC LTD., THE ARGUMENT OF THE ASSESSEE IS THAT SEGME NTAL BREAK - UP WAS NOT PROVIDED AND THE SAID CONCERN WAS ENGAGED IN RENDERING OUTSOURCED PRODUCT DEVELOPMENT SERVICES AND IMAGING TECHNOLOGIES. THE LD. AR OF THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF NXP SEMICONDUCTORS INDIA PVT. LTD. IN I.T(TP).A. NO. 1174/BANG/2011 VIDE ORDER DATED 14.11.2014, AOL ONLINE INDIA PVT. LTD. ITA 1036/BANG/2011 DATED 18.03.2016 AS WELL AS LSI RESEARCH (INDIA) P. LTD. IN I.T.A. NO. 44 7/M/1 6 18 ITA NO. 1048/BANG/2011 AND PLEADED THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE AS TAKEN BY THE TPO. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. WITH REGARD TO THIS COMPANY VIZ. ACCEL TRANSMATIC, THE OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY. IT WAS FURTHER SUBMITTED THAT IN TH E DECISION OF THE MUMBAI BENCHES OF THE TRIBUNAL IN THE CASE OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005 - 06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPANY WE RE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHN OLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SE RVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD., DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEE S CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. I.T.A. NO. 44 7/M/1 6 19 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 20. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN SIMILAR SET OF FACTS, THESE COMPANIES ARE DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE ABOV E DECISION OF THE TRIBUNAL, WE DIRECT TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 8.3 VIS - - VIS CELESTIAL LTD., THE ARGUMENT OF THE ASSESSEE IS THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT. THIS COMPANY IS ENGAGED IN PRODUCTION OF ENZYMES, DEVELOPMENT OF DRUGS, RESEARCH IN PHARMACEUTICAL PRODUCTS, DISCOVERY, BIO - TECH, CONTRACT R & D AND THIS COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN - HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. FURTHER, TH E LD. COUNSEL FOR ASSESSEE HAS STRONGLY CONTENDED THAT THIS COMPANY IS EARNING SUPER PROFITS AND SUCH COMPANIES SHOULD BE REJECTED WHILE ARRIVING AT ARM S LENGTH PRICE. IT WAS THE SUBMISSION OF THE LD. COUNSEL THAT CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUED DRAFT RED HERRING I.T.A. NO. 44 7/M/1 6 20 PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH AND NOT THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE ANNUAL REPORT FOR FY 06 - 07. PER CONTRA, THE LD. DR HAS SUBMITTED THAT THE CELESTIAL BIO LABS IS INTO SOFTWARE DEVELOPMENT RELATING TO BIO IT VERTICAL. THE TPO HAS OBSERVED THAT THE COMPANY IS INTO SOFTWARE SERVICES. CELESTIAL LABS HAS BEEN PROVIDING CUS TOMIZED ENTERPRISE SOLUTIONS, BIO INFORMATICS SERVICES TO HEALTH AND LIFE SCIENCE SECTOR, LIKE GENE SEQUENCE COMPARISON AND ANALYSIS, PREDICTION MODELLING, DESIGN AND DEVELOPMENT OF DRUG MOLECULES AND DEVELOPMENT OF INDUSTRIAL ENZYMES. FURTHER, THE COMPANY IS HAVING VERY LOW PROFITS. MOREOVER, ALL THE OTHER QUANTITATIVE AND QUALITATIVE FILTERS ARE MET BY THIS COMPANY AND THEREFORE, THE TPO HAS SELECTED THIS COMPANY AS COMPARABLE. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. FROM THE WEBSITE OF THE COMPANY, THE TPO HAS NOTED THAT CELESTIAL BIOLABS IS RECOGNIZED BY DSIR(GOI) FOR ITS R & D ENDEAVOURS IN THE INSILCO DRUG DISCOVERY SOFTWARE DEVELOPMENT. CELESTIAL HAS BEEN PROVIDING CUSTOMIZED SOLUTION AND SERVICES IN BIO - IT AS WELL AS RESEARCH SERVIC ES OVER A DECADE. WITH REGARD TO SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPANY, NO DETAILS ARE AVAILABLE IN THE TPO ORDER. BESIDES THE ABOVE, THERE IS NO OTHER DETAIL IN THE TPO S ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE COMPANY. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN I.T.A. NO. 44 7/M/1 6 21 THAT CONNECTION ISSUED DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. THEREFORE, THERE WAS NO CONCRETE EVIDENCE THAT THE PRIMARY BUSINESS OF CELESTIAL LAB IS IN SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THEIR WEBSITE. THEREFORE, CONSIDERING THE FACTS OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT CELESTIAL LAB WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AN D MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASIS ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUG HT NOT TO HAVE BEEN CONSIDERED AS COMPARABLE. 8.4 WITH REGARD TO E - ZEST SOLUTIONS LTD. , T HIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE. BEFORE THE TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. IT WAS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT AS PER ANNUAL REPORT (NOTES TO ACCOUNTS OR DIRECTOR S REPORT) OF THE COMPANY FOR FINANCIAL YEAR 2006 - 07 DOES NOT PROVIDE ANY INFORMATION ON THE NA TURE OF SOFTWARE DEVELOPMENT INCOME. FURTHER, THERE WAS NO OTHER DETAIL AVAILABLE IN NOTES TO ACCOUNTS OF FY 2006 - 07 ON THE RELATED PARTY TRANSACTIONS. FURTHER, AS THE DETAILS RELATING TO FOREIGN EXCHANGE EARNINGS ARE NOT AVAILABLE, IT IS NOT CLEAR WHETHER THE COMPANY I.T.A. NO. 44 7/M/1 6 22 WOULD FULFIL THE FOREIGN EXCHANGE FILTER. IN THE ABSENCE OF SUFFICIENT INFORMATION TO JUDGE COMPARABILITY OF THE COMPANY, THE SAME CANNOT BE CONSIDERED AS A COMPARABLE COMPANY. PER CONTRA, THE LD. DR HAS SUBMITTED THAT AS PER THE WEBSITE OF THE E - ZEST SOLUTIONS, IT HAS BEEN MENTIONED AS UNDER: WE LEVERAGE OUR DOMAIN EXPERTISE, BUSINESS CONSULTING SKILLS AND TECHNOLOGY COMPE TE NCE TO PROVIDE BESPOKE/CUSTOM SOLUTIONS TO OUR CUSTOMERS FOR GAINING SUSTAINABLE EDGE OVER COMPETITION. THE COMPANY CA TERS TO DIVERSE INDUSTRY VERTICALS, FINANCIAL SERVICES MANUFACTURING, TRAVEL, HUMAN RESOURCES ETC. IN THE IR ENTERPRISE TRANSFORMATION BUSINESS PROCESS OPTIMIZATION, TECHNOLOGY IMPLEMENTATION, WORK FLOW DESIGN AND OPTIMIZATION. THEREFORE, THE TPO HAS OBS ERVED THAT THE COMPANY IS PREDOMINANTLY INTO SOFTWARE DEVELOPMENT SERVICES AND HENCE FUNCTIONALLY COMPARABLE AND THIS COMPANY IS CATERING TO FINANCIAL SERVICES SECTOR. WE HAVE CONSIDERED RIVAL SUBMISSIONS. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THIS COMPANY OUGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT TO THE ASSESSEE. IT WA S SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN E - BUSINESS CONSULTING SERVICES , CONSISTING OF WEB STRATEGY SERVICES, IT DESIGN SERVICES AND IN TECHNOLOGY CONSULTING SERVICES INCLUDING PRODUCT DEVELOPMENT CONSULTING SERVICES. THESE SERVICES, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS, ARE HIGH END ITES NORMALLY CATEGORI SED AS KNOWLEDGE PROCESS OUTSOURCING ( KPO ) SERVICES. IT I.T.A. NO. 44 7/M/1 6 23 IS FURTHER SUBMITTED THAT THIS COMPANY HAS NOT PROVIDED SEGMENTAL DATA IN ITS ANNUAL REPORT. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT SINCE THE ANNUAL REPORT OF THE COMPANY DOES NOT CONTAI N DETAILED DESCRIPTIVE INFORMATION ON THE BUSINESS OF THE COMPANY, THE ASSESSEE PLACES RELIANCE ON THE DETAILS AVAILABLE ON THE COMPANY S WEBSITE WHICH SHOULD BE CONSIDERED WHILE EVALUATING THE CO MPANY S FUNCTIONAL PROFILE. IT WA S ALSO SUBMITTED BY THE LEA RNED AUTHORISED REPRESENTATIVE THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND THEREFORE COMPANIES RENDERING KPO SERVICES OUGHT NOT TO BE CONSIDERED AS COMPARABLE TO SOFTWARE DEVELOPMENT COMPANIES . ON PERUSAL OF THE RECORDS, WE FIND THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES ONLY ON THE BASIS OF THE STATEMENT MADE BY THE COMPANY IN ITS WEBSITE IT APPEARS THAT THE TPO HAS NOT EXAMINED THE SERVICES RENDERED BY THE COMPANY TO GIVE A FINDING WHETHER THE SERVICE S PERFORMED BY THIS COMPANY ARE SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PERFORMED BY THE ASSESSEE. FROM THE DETAILS ON RECORD, WE FIND THAT WHILE THE ASSESSEE IS INTO SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY I.E. E - ZEST SOLUTIONS LTD., IS RENDERING PRODUCT DEVELOPMENT SERVICES AND HIGH END TECHNICAL SERVICES WHICH COME UNDER THE CATEGORY OF KPO SERVICES. IT HAS BEEN HELD BY THE HYDERABAD B ENCH OF THIS TRIBUNAL IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA)(P) LTD. IN ITA NO.1961(HYD)/2011 DT. I.T.A. NO. 44 7/M/1 6 24 23.11.2012 THAT KPO SERVICES ARE NOT COMPARABLE TO SOFTWARE DEVELOPMENT SERVICES AND ARE THEREFORE NOT COMPARABLE. FOLLOWING THE AFORESAID DECISION OF THE OF THE HYDERABAD TRIBUNAL IN THE AFORESAID CASE, WE HOLD THAT THIS COMPANY, I.E. E - ZEST SOLUTIONS L TD. BE OMITTED FROM THE SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND. THE A.O./TPO IS ACCORDINGLY DIRECTED. 8.5 VIS - A - VIS ISHIR INFOTECH LIMITED, THE ASSESSEE HAS SUBMITTED BEFORE THE TPO THAT AS PER THE FINANCIAL STATEMENTS, THE COMPANY FAILS THE EMPLOYEE TURNOVER FILTER ( .2,935,065/ .7,420,9887 = 3.96 %). AS PER SCHEDULE 15 OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2007, IT IS EVIDENT THAT ESTABLISHMENT EXPENSES ( .2,935,065) GROUPING CONTAINS ALL THE EMPL OYEE RELATED SALARY AND EXPENSES. ACCORDINGLY, THE ASSESSEE HAS SUBMITTED THAT ISHIR INFOTECH SHOULD NOT BE CONSIDERED AS A COMPARABLE AS IT DOES NOT SATISFY THE EMPLOYEE COST FILTER ADOPTED BY THE TPO. HOWEVER, FROM THE WEBSITE OF ISHIR INFOTECH, THE TPO HAS OBSERVED THAT OUR SOFTWARE DEVELOPMENT AND OUTSOURCING SERVICES OFFER COMPLETE PRODUCT LIFE CYCLE SOLUTIONS AS AN EXTENSION TO OUR CLIENTS ENGINEERING TEAM. WE ACCELERATE THE CREATION OF SOFTWARE PRODUCTS, REDUCE PRODUCT MARKETING TIME AND ASSIST IN M AKING SCHEDULES MORE PREDICTABLE . CONSIDERING THESE FUNCTIONS, ISHIR INFOTECH WAS TAKEN TO BE A COMPARABLE . I.T.A. NO. 44 7/M/1 6 25 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF ISHIR INFOTECH AS A COMPARABLE, SINCE THAT COMPANY FAILS EMPLOYEE S C OST FILTER OF 25% REVENUE. ACCORDING TO THE LEARNED AR , THE ISHIR INFOTECH EMPLOYEE COST AS A PERCENTAGE OF REVENUE IS ONLY 3.96%. THE LEARNED DR HOWEVER OBJECTED TO THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. ON A CAREFUL PERUSAL OF TH E MATERIAL ON RECORD, THE TPO HAS REJECTED THE PLEA OF THE ASSESSEE NOT TO INCLUDE THIS COMPANY AS COMPARABLE ONLY ON THE GROUND THAT THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTARY EVIDENCE WITH REGARD TO ISHIR INFOTECH. HOWEVER, THE TPO HAS ALSO NOT ASSIG NED ANY VALID REASON FOR INCLUSION OF THIS COMPANY AS COMPARABLE. THE MAIN OBJECTION OF THE ASSESSEE IS THAT ISHIR INFOTECH HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER AND THEREFORE, IT SHOULD NOT INCLUDED AS COMPARABLE. W E FIND THAT IN THE CASE OF 24/7 CO. PVT. LTD IN ITA NO. 227/BANG/2010 VIDE ORDER DATED 09.11.2012 , THE BANGALORE BENCHES OF THE TRIBUNAL HAS HELD THAT ISHIR INFOTECH IS ALSO OUT - SOURCING ITS WORK AND, THEREFORE, HAS NOT SATISFIED THE 25% EMPLOYEE COST FILTER AND THUS HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. AS THE FACTS OF THE CASE BEFORE US ARE SIMILAR, RESPECTFULLY FOLLOWING THE DECISION OF THE BANGALORE BENCHES OF THE TRIBUNAL REFERRED ABOVE , WE DIRECT THE AO/TPO TO EXCLUDE THE AFORESAID COMPAN Y FROM THE FINAL LIST OF COMPARAB LE COMPANIES FOR THE PURPOSE OF DETERMINING ALP. I.T.A. NO. 44 7/M/1 6 26 8.6 WITH REGARD TO KALS INFORMATION SYSTEMS LTD. (SEG.), WHEN THE TPO HAS PROPOSED THIS COMPANY FOR INCLUSION AS COMPARABLE, ON REVIEW OF THE ANNUAL REPORT OF THE COMPANY FOR THE YEAR ENDED 31 ST MARCH, 2007 , THE ASSESSEE HAS OBSERVED THAT THE COMPANY IS INTO PROVISION OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS ALE OF SOFTWARE PRODUCTS. BEFORE THE TPO, THE ASSESSEE HAS POINTED OUT THAT INVENTORIES UNDER THE SCHEDULES TO THE FINANCIAL STATEMENTS ON PAGE 16 OF THE ANNUAL REPORT DISCLOSES SOFTWARE DEVELOPMENT AS INVENTORY AND WORK - IN - PROGRESS. IT IS TO BE NOTED THAT A PURE SOFTWARE SERVICES PROVIDER WOULD NOT BE ABLE TO DISCLOSE SUCH DETAILS AS IT DOES NOT CARRY ANY SUCH INVENTORY OR WORK - IN - PROGRESS. FURTHE R, IT WAS ALSO POINTED BEFORE THE TPO THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION AND EARN REVENUES FROM THE DEVELOPMENT OF SOFTWARE PRODUCT VIZ. SOFTWARE LA VISION AND VIRTUAL INSURE AS ITS FIXED ASSET . THE COMPANY CONSISTING OF STPI UNIT ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PROFESSIONALS ON ONLINE PROJECTS. FURTHER, UNDER REVENUE RECOGNITION UNDER THE NOTES TO THE FINANCIAL STAT EMENTS ON PAGE 18 OF THE ANNUAL REPORT CLEARLY STATES THAT THE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS. HOWEVER, AS PER THE DATA TAKEN FROM CAPITAL LINE DATA BASE , THE TPO HAS NOTED THAT I.T.A. NO. 44 7/M/1 6 27 95.69% OF THE REVENUE OF THE COMPANY IS FROM SOFTWARE DEVELOPMENT, HE HAS TAKEN THIS COMPANY AS A COMPARABLE. BEFORE US, THE PRIMARY PLEA RAISED BY THE LD. COUNSEL FOR THE ASSESSEE TO ASSAIL THE INCLUSION OF THE AFORESAID COMPANY FROM THE LIST OF COMPARABLES IS THAT THEY ARE FUN CTIONALLY INCOMPARABLE AND THEREFORE, ARE LIABLE TO BE EXCLUDED. IN SUM AND SUBSTANCE, THE PLEA SET UP BY THE LD. AR IS THAT THE AFORESAID CONCERN IS ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS WHICH IS FUNCTIONALLY DIFFERENT FROM THE SERVICES UND ERTAKEN BY THE ASSESSEE IN ITS IT SERVICES SEGMENT. AS PER THE DISCUSSION IN PARA 13 AT PAGE 43 OF THE ORDER OF THE TPO, THE REASON ADVANCED FOR INCLUDING KALS INFORMATION SYSTEMS LTD., IS TO THE EFFECT THAT THE SAID CONCERN S APPLICATION SOFTWARE SEGMEN T IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE WHICH CAN BE CONSIDERED AS COMPARABLE TO THE ASSESSEE COMPANY. THE SAID CONCERN IS ENGAGED IN TWO SEGMENTS NAMELY APPLICATION SOFTWARE SEGMENT AND TRAINING. AS PER THE TPO, THE APPLICATION SOFTWARE SEGMENT IS FUN CTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAID CONCERN IS ENGAGED IN SOFTWARE SERVICES. THE STAND OF THE ASSESSEE IS THAT A PERUSAL OF THE ANNUAL REPORT OF THE SAID CONCERN FOR F.Y. 2006 - 07 REVEALS THAT THE APPLICATION SOFTWARE SEGMENT IS ENGAGED IN THE BUSINESS OF SALE OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES. THE ASSESSEE POINTED OUT THIS TO THE TPO THAT THERE WAS NO BIFURCATION AVAILABLE BETWEEN THE BUSINESS OF SALE I.T.A. NO. 44 7/M/1 6 28 OF SOFTWARE PRODUCTS AND THE BUSINESS OF SOFTWARE SERVICES, AND THEREFORE, IT WAS NOT APPROPRIATE TO ADOPT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN FOR THE PURPOSES OF COMPARABILITY WITH THE ASSESSEE S IT - SERVICES SEGMENT. THE TPO HOWEVER, NOTICED THAT THOUGH THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN MAY BE ENGAGED I N SELLING OF SOME OF THE SOFTWARE PRODUCTS WHICH ARE DEVELOPED BY IT, HOWEVER, THE SAID CONCERN WAS NOT INTO TRADING OF SOFTWARE PRODUCTS AS THERE WAS NO COST OF PURCHASES DEBITED IN THE PROFIT & LOSS ACCOUNT. THOUGH THE TPO AGREED THAT THE QUANTUM OF REVE NUE FROM SALE OF PRODUCTS WAS NOT AVAILABLE AS PER THE FINANCIAL STATEMENTS OF THE SAID CONCERN, BUT AS THE BASIC FUNCTION OF THE SAID CONCERN WAS SOFTWARE DEVELOPMENT, IT WAS INCLUDIBLE AS IT WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEE S SEGMENT OF IT - SER VICES. BEFORE US, APART FROM REITERATING THE POINTS RAISED BEFORE THE TPO AND THE DRP, BY RELYING ON THE DECISION IN THE CASE OF NOVELL SOFTWARE DEVELOPMENT (INDIA) P. LTD. V. DCIT IN ITA NO. 1287/BANG/2011 DATED 31.03.2016 FOR THE ASSESSMENT YEAR 2007 - 0 8, THE BANGALORE BENCH OF THE TRIBUNAL HAS OBSERVED THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR OF 2006 - 07, THE SAID CONCERN WAS EVALUATED BY THE ASSESSEE AND WAS FOUND FUNCTIONALLY INCOMPARABLE AND THE AFORESAID POSITION HAS BEEN ACCEPTED BY THE TPO IN THE EARLIER A.Y. 2006 - 07 AND THEREFORE, THERE WAS NO JUSTIFICATION FOR THE TPO I.T.A. NO. 44 7/M/1 6 29 TO CONSIDER THE SAID CONCERN AS FUNCTIONALLY COMPARABLE IN THE INSTANT ASSESSMENT YEAR . IN OUR CONSIDERED OPINION, THE POINT RAISED BY THE ASSESSEE IS POTENT IN AS MUCH AS IT IS QUITE EVIDENT THAT THE SAID CONCERN HAS NOT BEEN FOUND TO BE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND IN THE PRESENT YEAR ALSO, ON THE BASIS OF THE ANNUAL REPORT, REFERRED TO IN THE WRITTEN SUBMISSIO NS ADDRESSED TO THE LOWER AUTHORITIES, THE ASSESSEE HAS CORRECTLY ASSERTED OUT THAT THE SAID CONCERN WAS INTER ALIA ENGAGED IN SALE OF SOFTWARE PRODUCTS, WHICH WAS QUITE DISTINCT FROM THE ACTIVITY UNDERTAKEN BY THE ASSESSEE IN THE IT SERVICES SEGMENT. AT T HE TIME OF HEARING, NEITHER IS THERE ANY ARGUMENT PUT FORTH BY THE REVENUE AND NOR IS THERE ANY DISCUSSION EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES AS TO IN WHAT MANNER THE FUNCTIONAL PROFILE OF THE SAID CONCERN HAS UNDERGONE A CHANGE FROM THAT IN THE IMMEDIATELY PRECEDING YEAR. THEREFORE, HAVING REGARD TO THE FACTUAL ASPECTS BROUGHT OUT BY THE ASSESSEE, IT IS CORRECTLY ASSERTED THAT THE APPLICATION SOFTWARE SEGMENT OF THE SAID CONCERN IS NOT COMPARABLE TO THE ASSESSEE S SEGMENT OF IT SERVICES AND ACCORDINGLY, WE DIRECT TO EXCLUDE THE SAME FOR THE LIST OF COMPARABLES . 8. 7 VIS - - VIS LUCID SOFTWARE LTD., ACCORDING TO THE ASSESSEE, THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE BECAUSE THE COMPANY INTO SALE OF SOFTWARE PRODUCTS. FURTHER, IT WAS SUBMITTED BEFORE THE TPO THAT THE I.T.A. NO. 44 7/M/1 6 30 COMPANY HAD AMORTIZED PRODUCT DEVELOPMENT EXPENSES AMOUNTING TO .1866703/ - DURING THE YEAR. ON PERUSAL OF THE CAPITAL LINE DATA BASE, THE TPO HAS NOTICED THAT PREDOMINANTLY THE COMPANY IS CATERING INTO SOFTWARE DEVELOPMENT AND SERVICES SECTOR. AFTER CONSIDERING THE FACT, THE TPO HAS OBSERVED THAT AMORTIZATION WOULD BE SPREAD OVER A NUMBER OF YEARS STILL THE DEBIT IN THE P & L ACCOUNT ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENSES IS NOT VERY SUBSTANTIAL AND HENCE THIS COMPANY HAS BEEN TAKEN AS A COMPARABLE. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT T HIS COMPANY IS ENGAGED IN PROVISION OF BOTH SOFTWARE PRODUCTS AND SOFTWARE SERVICES AND MOREOVER, NOT PROVIDED SEGMENTAL DETAILS. IN THE ABSENCE OF SEGMENTAL DETAILS, THE COMPANY SHOULD BE REJECTED AS COMPARABLE. FURTHER, IT WAS ALSO SUBMITTED THAT THE MAR GIN AS PER TP ORDER WAS 54.85% WHEREAS THE CORRECT NET PROFIT MARGIN AS PER ITAT RULINGS IS 19.75% ONLY. MOREOVER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE BANGALORE BENCHES OF TH E TRIBUNAL IN ITS ORDER IN THE CASE OF M/S. 3DPLM SOFTWARE SO LUTIONS LTD. IN IT(TP)A NO.1303/BANG/2012 DT.28.12.2013 FOR ASSESSMENT YEAR 2008 - 09 HAS HELD THAT THIS COMPANY IS TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR SOFTWARE DEVELOPMENT SERVICE PROVIDERS AND THEREFORE PRAYED THAT THIS COMPANY BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CASE ON HAND ALSO. I.T.A. NO. 44 7/M/1 6 31 P ER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERE D THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL DECISION CITED AND PLACED RELIANCE UPON. WE FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) FOR ASSESSMENT YEAR 2008 - 09 HAS HELD THAT THIS COMPANY H AS TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR SOFTWARE DEVELOPMENT SERVICE PROVIDERS AS IT IS ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT AND THE RELEVANT OBSERVATIONS OF THE ORDER AT PARA 16.3 THEREOF IS EXTRACTED HEREUNDER : 16.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THE COMPANY I.E. LUCID SOFTWARE LTD., IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS WHEREAS THE ASSESSEE, IN THE CASE ON HAND, IS IN T HE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE ALSO FIND THAT, CO - ORDINATE BENCHES OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 (IT(TP)A NO.845/BANG/2011), LG SOFT INDIA PVT. LTD. (SUPRA), CSR INDIA PVT. LTD. (SUPRA); THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) AND THE DELHI ITAT IN THE CASE OF TRANSWITCH INDIA PVT. LTD. (SUPRA) HAVE HELD, THAT SINCE THIS COMPANY, IS ENGAGED IN THE SOFTWARE PRODUCT DEVELOPMENT AND NOT SOFTWARE D EVELOPMENT SERVICES, IT IS FUNCTIONALLY DIFFERENT AND DIS - SIMILAR AND IS THEREFORE TO BE OMITTED FROM THE LIST OF COMPARABLES FOR SOFTWARE DEVELOPMENT SERVICE PROVIDERS. THE ASSESSEE HAS ALSO BROUGHT ON RECORD DETAILS TO DEMONSTRATE THAT THE FACTUAL AND OT HER CIRCUMSTANCES PERTAINING TO THIS COMPANY HAVE NOT CHANGED MATERIALLY FROM THE EARLIER YEAR I.E. ASSESSMENT YEAR 2007 - 08 TO THE PERIOD UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2008 - 09. IN THIS FACTUAL MATRIX AND FOLLOWING THE AFORE CITED DECISIONS OF TH E CO - ORDINATE BENCHES OF THIS TRIBUNAL AND OF THE ITAT, MUMBAI AND DELHI BENCHES (SUPRA), WE DIRECT THAT THIS COMPANY BE OMITTED FROM THE LIST OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION IN THE CASE ON HAND.' I.T.A. NO. 44 7/M/1 6 32 FOLLOWING THE DECISION OF THE CO - ORDIN ATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) FOR ASSESSMENT YEAR 2008 - 09, WE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT; (BEING ENGAGED IN SOFTWARE PRODUCT DEV ELOPMENT) FROM THE ASSESSEE IN THE CASE ON HAND WHO IS RENDERING ONLY SOFTWARE DEVELOPMENT SERVICES. IT IS ORDERED ACCORDINGLY. 8 .8 MEGASOFT LTD.: THIS COMPANY WAS CHOSEN AS A COMPARABLE BY THE TPO. THE OBJECTION OF THE ASSESSEE IS THAT THERE ARE TWO SEGM ENTS IN THIS COMPANY VIZ., (I) SOFTWARE DEVELOPMENT SEGMENT, AND (II) SOFTWARE PRODUCT SEGMENT. THE ASSESSEE IS A PURE SOFTWARE SERVICES PROVIDER AND NOT A SOFTWARE PRODUCT DEVELOPER. ACCORDING TO THE ASSESSEE THERE IS NO BREAK UP OF REVENUE BETWEEN SOFTWA RE PRODUCTS AND SOFTWARE SERVICES BUSINESS ON A STANDALONE BASIS OF THIS COMPARABLE. MOREOVER, THE COMPANY GOT AMALGAMATION WITH VISUAL SOFT TECHNOLOGIES LTD. BEING AN EXTRAORDINARY EVENT AND PRAYED THAT THIS COMPANY SHOULD NOT BE INCLUDED AS COMPARABLE FO R DETERMINING ALP. P ER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES BY THE TPO. I.T.A. NO. 44 7/M/1 6 33 WE HAVE HEARD RIVAL CONTENTIONS. THE MAIN CONTENTION OF THE LD. AR OF THE ASSESSEE IS THAT THIS COMPANY GOT AMALGAMATION WITH VISUAL SOFT TECHNOLOGIES LTD. BEING AN EXTRAORDINARY EVENT AND THUS CANNOT BE TAKEN AS COMPARABLE. WE FIND FORCE IN THE ARGUMENT OF THE LD. AR. I N OUR CONSIDERED OPINION, THE FACTOR OF AMALGAMATION OR MERGER OR ACQUISITIONS, ETC., HAS ITS OWN IMPLICATIONS ON THE FINANCIAL RESULTS OF A COMPANY AS THESE ARE ABNORMAL FINANCIAL CHARACTERISTICS WHICH DISTORT THE NORMAL PROFITABILITY. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MUM) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERGERS. SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2 013) VIDE ITS ORDER DATED 23.4.2015. IN VIEW OF THE ABOVE DECISIONS OF THE COORDINATE BENCHES OF THE TRIBUNAL, WE ARE OF THE OPINION THAT IN CASE THERE WAS A MERGER BY WAY OF AMALGAMATION DURING THE YEAR ITSELF, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDER ED AS COMPARABLE DUE TO THIS EXTRAORDINARY FINANCIAL EVENT. THIS FACT NEEDS VERIFICATION. ACCORDINGLY, WE DIRECT THE TPO TO VERIFY AND DECIDE AFRESH FOR INCLUSION OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. 8. 9 R. SYSTEMS INTERNATIONAL LTD.: WITH REG ARD TO THIS COMPARABLE, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE FINANCIAL STATEMENTS I.T.A. NO. 44 7/M/1 6 34 AVAILABLE IN THE PUBLIC DOMAIN RELATES TO PERIOD ENDED 31 ST DECEMBER, 2006. THE USE OF DECEMBER, 2006 FINANCIAL STATEMENT IS AGAINST THE INDIAN INCOME TAX ACT. MOREOVER, THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS SUCH AS INDUS LENDING SOLUTIONS AND ECNET SUPPLY CHAIN EXECUTION AND THEREFORE, HE HAS SUBMITTED THAT THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS IT IS FUNCTI ONALLY DIFFERENT FROM THE ASSESSEE. HOWEVER, WITH REGARD TO THE DETAILS OF THE COMPANY, TPO HAS FOUND THE SAME FROM THE PROWESS DATABASE. SINCE THIS COMPANY IS FUNCTIONALLY DIFFERENT, ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS, WE DIRECT TO EXCLUDE FROM T HE LIST OF COMPARABLES. 8.10 WITH REGARD THIRDWARE SOLUTIONS LTD, NO DETAIL IS EMANATING FROM THE ORDER OF THE TPO. SINCE THIS COMPANY IS FUNCTIONALLY DIFFERENT VIZ., TRADING IN SOFTWARE PRODUCTS AND DERIVES REVENUE FROM LICENSING OF SOFTWARE PRODUCTS, T HIS COMPANY CANNOT BE INCLUDED AS COMPARABLE. TURNOVER FILTER 9. WE FURTHER FIND FROM THE TPO S ORDER THAT HE HAS SELECTED 28 COMPARABLES AND APPLIED A LOWER TURN OVER FILTER OF .1 CRORE BUT PREFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDANCE NOTE HAS OBSERVED THAT THE TRANSACTION ENTERED INTO BY A .1000 CRORES COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A .10 CRORES COMPANY AND THE TWO MOST I.T.A. NO. 44 7/M/1 6 35 OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND RELATED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 VIDE ORDER DATED 20.09.2010 RELYING ON DUN AND BRADSTREET S ANALYSIS HAD HELD THAT TURNOVER RANGE OF .1 CRORE TO . 200 CRORES IS APPROPRIATE AND OBSERVED AS UNDER: 9. .WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MO RE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASO NABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 9 .1 THE ABOVE VIEW HAS BEEN FOLLOWED BY T HE BANGALORE BENCHES OF THE TRIBUNAL IN THE RECENT ORDER IN THE CASE OF M/S. TRILOGY E - BUSINESS SOFTWARE INDIA PRIVATE LTD. V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012 AND T HE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED AS UNDER: I.T.A. NO. 44 7/M/1 6 36 20. IN THIS RE GARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING TH E COMPARABLES. THE ASSESSEE S TURNOVER IS RS.47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPA NIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ. TURNOVER . (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEM S LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES 9. 2 IN VIEW OF THE ABOVE SAID REASONING AND THE ORDERS OF THE BAN GALORE BENCHES OF THE TRIBUNAL CITED SUPRA, THE FOLLOWING EIGHT COMPANIES HAVE BE EN ELIMINATED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED; IGATE GLOBAL SOLUTIONS LIMITED; INFOSYS TECHNOLOGIES LTD. MIN DTREE LIMITED; PERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIES LIMITED; TATA ELXSI LIMITED; & WIPRO LIMITED 10. AFTER EXCLUSION OF VARIOUS COMPANIES FROM THE LIST OF COMPARABLES BY MEANS OF TURNOVER FILTER, FUNCTIONALLY DIFFERENT, HAVING EXTRAORDINARY EVENTS I.T.A. NO. 44 7/M/1 6 37 LIKE MERGER/AMALGAMATION AS WELL AS EARNING SUPER PROFITS, 14 COMPANIES OUT OF 34 IS ACCEPTABLE FOR INCLUSION IN THE LIST OF COMPARABLES FOR DETERMINING THE ALP. BASED ON THE ABOVE, THE TPO IS DIRECTED TO REWORK THE PLI OF THE ABOVE CO MPARABLES AND RECOMPUTED THE ARMS LENGTH PRICE ADJUSTMENT IF ANY NECESSARY. ORDERED ACCORDINGLY. ECONOMIC ADJUSTMENTS (GROUND NO. 19) 11 . WE HAVE DULY CONSIDERED THE SUBMISSION MADE BY THE ASSESSEE ON THIS ISSUE. TO BE PRECISE, IT WAS THE CONTENTION OF THE ASSESSEE THAT THE WORKING CAPITAL ADJUSTMENT HAS BEEN WRONGLY WORKED OUT BY THE TPO WHICH REQUIRES RECONCILIATION. SINCE THE ASSESSEE S GROUND REQUIRES TO BE RECONCILED AT THE AO/TPO S LEVEL, THE ISSUE IS REMITTED BACK ON THE FILES OF THE AO/TPO WITH A DIRECTION TO VERIFY THE VERACITY OF THE ASSESSEE S CLAIM AND TO RECTIFY THE SAME, IF IT SO WARRANTS BY THE INDIAN TRANSFER PRICING REGULATIONS, OECD GUIDELINES, ETC. 1 2 . BY REFERRING TO GROUND NO. 20, THE LD. COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY ARG UED THAT THE TPO/AO HAS ERRED BY IGNORING THE FACT THAT THE ASSESSEE IS ELIGIBLE FOR TAX HOLIDAY AND THERE CANNOT BE ANY PLAUSIBLE INTENT TO SHIFT PROFITS THEREBY VIOLATING THE BASIC INTENT OF INTRODUCTION OF TP PROVISIONS. AFTER DULY CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE, WE DIRECT THE TPO/AO TO GIVE A FINDING AS TO WHETHER THE ASSESSEE IS ELIGIBLE FOR TAX I.T.A. NO. 44 7/M/1 6 38 HOLIDAY SINCE THE ORDER OF AUTHORITIES BELOW IS SILENT ON THE ISSUE. ACCORDINGLY WE REMIT THE ISSUE BACK TO THE FILE OF THE TPO FOR DE NOVO CONSID ERATION. 1 3 . WITH REGARD TO GROUND NO. 21 VIZ., DETERMINATION OF ARM S LENGTH MARGIN/PRICE USING EXTERNAL COMPARABLES, ONLY THE DATA OF RELEVANT FINANCIAL YEAR I.E., 2006 - 07 RELEVANT TO THE ASSESSMENT YEAR 2007 - 08 IS REQUIRED TO BE CONSIDERED IN VIEW OF THE PROVISIONS OF RULE 10B(4) AND MOREOVER, MULTIPLE YEAR DATA CANNOT BE ADOPTED BY THE ASSESSEE WITHOUT GIVING VALID REASON. THUS, THE GROUND RAISED BY THE ASSESSEE IS REJECTED. 1 4 . IN GROUND NO. 22, THE ASSESSEE HAS CONTENDED THAT THE AUTHORITIES BEL OW HAVE ERRED IN NOT ALLOWING THE 5% BENEFIT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. THE TPO/AO IS DIRECTED TO WORK OUT THE ALP OF THE ASSESSEE IN ACCORDANCE WITH THE DIRECTIONS GIVEN ABOVE AND IF FOUND THAT THE DIFFERENTIAL IN THE MARGIN OF THE AS SESSEE AND THE COMPARABLES IS BEYOND 5% BANDWIDTH RECOGNIZED IN PROVISO TO SECTION 92C(2) OF THE ACT, THEN ADJUSTMENT IS REQUIRED TO BE MADE TO THE REPORTED VALUE OF THE ASSESSEE S TRANSACTION WITH ITS AE. ACCORDINGLY, WE REMIT THE ISSUE FOR DE NOVO CONSID ERATION. 1 5 . AGAINST THE DRAFT ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT DATED 31.12.2010, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP BY RAISING VARIOUS ISSUES INCLUDING CORPORATE TAX MATTERS. I.T.A. NO. 44 7/M/1 6 39 1 6 . WITH REGARD EXCLUSION O F EXPENSES INCURRED IN FOREIGN EXCHANGE FROM TOTAL TURNOVER, THE ASSESSING OFFICER HAS EXCLUDED THE EXPENSES INCURRED IN FOREIGN EXCHANGE ONLY FROM EXPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER. BY RELYING ON THE DECISION IN THE CASE OF ITO V. SAK SOFT [ 2009] 313 ITR 353 (SB) (ITAT)(CHENNAI), WHEREIN IT WAS HELD THAT PARITY SHOULD BE MAINTAINED BETWEEN THE NUMERATOR AND DENOMINATOR AND THEREFORE, EXPENSES EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM TOTAL TURNOVER, THE AR OF THE ASSESSEE HAS PLEADED THAT THE ABOVE DECISION OF THE TRIBUNAL SHOULD BE FOLLOWED. HOWEVER, THE DRP HAS REJECTED THE SUBMISSION OF THE ASSESSEE ON THE GROUND THAT THE DEPARTMENT HAS PREFERRED AN APPEAL BEFORE THE HON BLE MADRAS HIGH COURT AND THE LEGAL ISSUE HAS NOT YET REACHED FINALITY. 1 6 .1 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT SINCE THE ORDER OF THE TRIBUNAL IN THE CASE OF ITO V. SAK SOFT LTD. (SUPRA) HAS NOT BEEN STAYED BY THE HON BLE HIGH COURT, THE ISSUE INVOLVED IN THIS APPEAL IS SQUAREL Y COVERED BY THE DECISION OF THE SPECIAL BENCH OF ITAT, CHENNAI IN THE CASE OF ITO V. SAK SOFT LTD. [121 TTJ 865]. 1 6 .2 WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT THE ASSESSING OFFICER HAS EXCLUDED THE EXPENSES INCURRED IN FOREIGN EXCHANGE ONLY FROM EXPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER. WE ARE OF THE OPINION THAT THIS ISSUE I.T.A. NO. 44 7/M/1 6 40 IS SQUARELY COVERED BY THE ORDER OF THE ITAT, CHENNAI SPECIAL BENCH IN THE CASE OF M/S. SAK SOF T LTD. (SUPRA), WHEREIN, IT WAS HELD AS UNDER: ' .... WE HOLD THAT FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB - S (4) OF S.10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMU LA. .. ' 1 6 .3 JUST BECAUSE THE DEPARTMENT HAS PREFERRED AN APPEAL BEFORE THE HON BLE HIGH COURT, WE CANNOT TAKE A DIFFERENT VIEW AGAINST THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO V. SAK SOFT LTD. (SUPRA). ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO REDUCE THE EXPENSES INCURRED IN FOREIGN EXCHANGE BOTH FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. 1 7 . THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE ASSESSING OFFICER HAS FAILED TO EXCLUDE THE EXPORT PROCEEDS , WHICH HAVE NOT BEEN REALIZED IN TIME , BOTH FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. IN D ETERMINATION OF TOTAL TURNOVER, THE ASSESSING OFFICER HAS FAILED TO EXCLUDE THE EXPORT PROCEEDS, WHICH HAVE NOT BEEN REALIZED IN TIME, BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. BY R ELYING ON VARIOUS CASE LAW, THE ASSESSEE HAS PLEADED THAT THE EXPORT PROCEEDS NOT REALIZED TO THE TUNE OF .8,47,41,795/ - , WHICH HAVE BEEN REDUCED FROM THE EXPORT TURNOVER, SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER OF THE ASSESSEE COMPANY. HOWEVER, I.T.A. NO. 44 7/M/1 6 41 TH E LD. DRP HAS HELD THAT THE OBJECTION OF THE ASSESSEE IS DEVOID OF MERIT AND FINDS NO NEED FOR INTERFERENCE IN THE ACTION OF THE ASSESSING OFFICER TO EXCLUDE EXPORT PROCEEDS WHICH HAVE NOT BEEN REALIZED IN TIME FROM TOTAL TURNOVER AND CONFIRMED THE ORDER O F THE ASSESSING OFFICER. 1 7 .1 BEFORE US, BY REITERATING THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE EXPORT PROCEEDS WHICH HAVE NOT BEEN REALIZED IN TIME SHOULD BE EXCLUDED FROM BOTH EXPOR T TURNOVER AS WELL AS TOTAL TURNOVER. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 1 7 .2 WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH PARTIES AND PERUSED THE ORDERS OF AUTHORITIES BELOW. IN THIS CASE, ADMITTEDLY, THE EXPORT PROCE EDS TO THE TUNE OF .8,47,41,795/ - HAVE NOT BEEN REALIZED. HOWEVER, IN THE DRAFT ASSESSMENT ORDER, THE ASSESSING OFFICER HAS REDUCED THE SAME FROM THE EXPORT TURNOVER, BUT FAILED TO REDUCE FROM THE TOTAL TURNOVER AS WELL. AS WE HAVE REPRODUCED THE RELEVANT FINDINGS OF THE CHENNAI SPECIAL BENCH DECISION IN THE CASE OF ITO V. SAK SOFT (SUPRA), WHEREIN IT WAS HELD THAT PARITY SHOULD BE MAINTAINED BETWEEN THE NUMERATOR AND DENOMINATOR AND THEREFORE, EXPENSES EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM TOTAL TURNOVER. FOLLOWING THE SAME ANALOGY OF THE ABOVE SPECIAL BENCH DECISION, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE EXPORT PROCEEDS, I.T.A. NO. 44 7/M/1 6 42 WHICH HAVE NOT BEEN REALIZED IN TIME, BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. THUS, THE GROUN D RAISED BY THE ASSESSEE IS ALLOWED. 1 8 . THE NEXT GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS DISALLOWED THE EXPENDITURE OF .11,09,719/ - UNDER SECTION 14A OF THE ACT READ WITH RULE 8D IN EARNING OF DIVIDEND INCOME. THE ASSESSEE CONTENDED BEFORE THE LD. DRP THAT RULE 8D IS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. MOREOVER, IT WAS ALSO CONTENDED THAT THE ASSESSEE HAS NOT INC URRED ANY EXPENDITURE IN RELATION TO THE EXEMPT INCOME. THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER SHOULD NOT BE LEGALLY SUSTAINABLE. BY RELYING ON VARIOUS CASE LAW, THE LD. DRP SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. ON BE ING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 1 8 .1 BEFORE US, BY RELYING ON VARIOUS CASE LAW INCLUDING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEE S OWN CASE IN I.T.A. NO. 394 & 395/MDS/2006 , WHEREIN, THE TRIBUNAL HAS HELD THAT ONLY ACTUAL EXPENDITURE INCURRED IN EARNING EXEMPTED INCOME TO BE DISALLOWED ON ACTUAL BASIS AND NOT ON ADHOC ESTIMATE BASIS, THE LD. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT SHOULD BE DELETED. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. I.T.A. NO. 44 7/M/1 6 43 1 8 . 2 WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE ORDERS OF AUTHORITIES BELOW. WITH REGARD TO THE DISALLOWANCE UNDER SECTION 14A OF THE ACT IN COMPUTING INCOME UNDER NORMAL PROVISIONS, THE LD. COUNSEL FOR THE ASSESSEE HAS ARGUED THAT RULE 8D IS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. THE HON BLE MUMBAI HIGH COURT IN THE CASE OF GODRE J & BOYCE MFG. CO. LTD. V. DCIT 328 ITR 81 HAS HELD THAT RULE 8D CANNOT BE APPLIED RETROSPECTIVELY BUT ONLY FROM THE ASSESSMENT YEAR 2008 - 09. IN THIS CASE, THE ASSESSING OFFICER HAS WORKED OUT THE EXPENDITURE COMPONENT AND DISALLOWED .11, 09,719/ - AS EXPEN DITURE FOR EARNING DIVIDEND INCOME. HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY CONTENDED BEFORE US THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE TOWARDS EARNING THE DIVIDEND INCOME. HOWEVER, IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. D CIT (SUPRA), THE HON BLE MUMBAI HIGH COURT HAS ALSO HELD THAT APPLICATION OF PROVISIONS OF 14A ARE 'CONSTITUTIONALLY VALID' AND PROVISIONS OF SECTION 14A ARE STILL APPLICABLE FOR EARLIER ASSESSMENT YEARS AND THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE EXPENDITURE BY ADOPTING A REASONABLE BASIS OR METHOD. THEREFORE, E VEN THOUGH THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION SINCE THEY HAVE BEEN INTRODUCED W.E.F. 24.03.2008, WE ARE OF THE CONSIDERED OPINION THAT IN VIEW OF THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF SIMPSON & CO. LTD. IN T.C. NO. 2621 OF 2006 DATED 15.10.2012, AN ESTIMATE I.T.A. NO. 44 7/M/1 6 44 OF 2% OF GROSS INCOME FROM INVESTMENTS RECEIVED MAY BE DISALLOWED TOWARDS EXPENDITURE FOR EARNING SUCH INCOME. ACCORDINGLY, WE SET ASIDE THE ORDER S OF AUTHORITIES BELOW ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO DISALLOW 2% OF GROSS INCOME FROM INVESTMENTS TOWARDS EXPENDITURE FOR EARNING SUCH INCOME. THUS, THE GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 1 9 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON THE 2 ND JANUARY , 201 7 AT CHENNAI. SD/ - SD/ - (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 02 . 0 1 .201 7 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.